HELP: Master Lease Option on 21 Units - Am I missing anything?

[Sam Simones]

Hello All,

I know that Master Lease Options have been discussed a ton on here, but after searching endlessly I couldn't find anything addressing some specific concerns/questions I had so here it goes...

• The potential seller is a full time firefighter who has 3 very involved kids and is also a part owner of restaurants across the country with his brother.  His motivation to sell is because of how busy he is and he hasn't been able to manage the properties to his very high standards the last few years.  He owns a 9 unit, an 8 unit, and a 4 unit.
• His places are very under rented, by design.  He's currently getting $20,575/month in rents.  His mortgage is $8,646.  After taking into account property taxes, utilities, water, insurance, and a 10% repairs & capEx fund, I figure he's making ~$5,000/month.  He said his starting point for talking price would be around 100x gross monthly rent but probably higher due to the fact he knows they're under rented.
• Here is my proposal: I'll pay a lease of $10,600 ($2,000 up and above his mortgage) and as a master lessee I'll be responsible for every other expense. I'll give him 33% of the rent increases and the strike price for the option will be $2.2 million (107x gross monthly rent - CAP of 7.4% with no vacancy built in). The lease would last 5 years and his downside protection would be if the lease was not executed, I would owe him a fee of $75,000.
• Getting the rents up to market would be a monthly increase of $3,675, which would result in a valuation increase of $550,000 using my banks' CAP rate. My bank has said that I can use that appreciation increase as my down payment to give them a LTV of 80% or under.
• So he's making $2,000/month and increasing, plus paying principal off (would be about $200,000 of principal pay off over 4-5 years), keeping the depreciation and other tax benefits and having downside protection if I were to screw up and not be able to get the job done.  I'd be getting the cash flow arbitrage (I'm figuring about $40,000/yr) and growing with rent increases.  I'm getting the benefit of the appreciation which will allow me to buy with no out of pocket cost.  And I'm getting a first right of refusal on an A+ building in an A+ location that he currently owns.

Is there anything I'm missing or does anyone have any thoughts on issues they see with my deal structure?  Any input would be greatly appreciated.  Sorry for the lengthy post.